September 23, 2018
Savvy CFO Makes Move as Time Runs Out
In 2015, the Seattle Seahawks were about to claim their second consecutive Super Bowl victory when the Patriots Malcom Butler stepped in front of a last-second Russell Wilson pass to snatch the win away from Seattle. It was much the same story (finance style) recently as a physician-owned hospital’s CFO snatched back more than $100,000 in hidden bank charges on a $15 million loan hedge with less than 24 hours on the clock. Here’s the back-story in real time.
Thursday - 10:49 AM – CMAC receives a call from the Borrower who explains that their loan closed the prior day and that the Loan Agreement requires the Borrower to hedge the interest rate within 2 days. The bank had provided a fixed rate using a swap contract. The CFO had just learned that banks price-up swaps for the borrower from the bank’s actual swap cost. These costs (the “swap spread”) cannot be seen by the borrower who is typically unaware that the rate quoted is higher than the bank’s cost. Is this proposed pricing fair?
Thursday - 11:12 AM – CMAC reviews the proposed pricing and, utilizing live data from its Bloomberg terminal, finds that the bank is pricing up the swap to a level where there should be room for improvement.
Thursday - 1:16 PM – CMAC reports its findings to the Borrower and the parties pull the bank into a conference call. CMAC advises the bank that it had a recent proposal from that same bank with a significantly lower swap spread. The Bank holds firm on its pricing. It states that its pricing is fair and reminds the Borrower of its obligation to hedge by the following day. The Borrower seems road-blocked.
Thursday - 2 PM – The CMAC derivatives team huddles for a strategy session. In a review of the documents, it is noted that the agreement requires an interest rate hedge but does not specify a swap. The team arrives at a possible alternative in which Borrower would comply with the requirement by purchasing a low-cost rolling cap. Because caps can be purchased from any bank, the lending bank now stands to lose a substantial swap profit.
Thursday - 4:47 PM – CMAC and the Borrower call the Bank and advise them that the Borrower will comply with the requirement by purchasing a cap as opposed to a swap and that the Bank will be given an opportunity to bid on the cap. The Bank pushes back, stating that a cap is not preferred by the Bank. It will, however, look at the proposed swap to see if there is any room for improvement. The Bank understands its leverage has been weakened.
Friday - 9:15 AM – With all parties on the phone, the Bank says that as a matter of goodwill, it will agree to cut its swap spread in half. CMAC and the Borrower express sincere thanks for their cooperation.
Friday - 10:12 AM – The swap is executed at the agreed spread. During the execution call, CMAC is seeing a cost that is a fraction of a basis point below what is being quoted by the Bank. CMAC asks the bank to please round to three decimals and thereby picks up an additional ½ basis point. Total present savings from the original spread - $111,749. SNATCH! Well played.